Post-Election Volatility Analysis

After Donald Trump's surprise victory over Hillary Clinton on November 8th, global markets appeared to be in free fall. However, negative sentiment reversed in epic fashion on the morning of November 9th and transformed into yet another jaw-dropping rally.

Prior to the election, popular sentiment suggested that global financial markets were more comfortable with Hillary Clinton as the next President-elect. This bias was observed when the FBI released some “new” information regarding Hillary Clinton's private email server on October 28th, which subsequently kicked off a steady rise in the VIX (from 16 to 22) over the next five trading days.

On November 6th, the FBI announced that their review of the “new” information warranted no additional action, and the VIX proceeded to slide back from 22 to 18 on November 7th and 8th. Given that volatility actually came in on election day one would have to assume markets were fairly comfortable with which candidate would ultimately prevail and how markets might react the next day.

However, just like “Brexit,” the world woke up to a surprise (in the electoral college, not the popular vote) and markets were tumultuous.

Around the same time Trump was warming up for his victory speech, the Dow Jones Futures had given up over 800 points, the VIX was trading back above 20, and gold was bid well over $1300/ounce. Amazingly, markets reversed once again the next morning.

Inexplicably, stocks shrugged the negative sentiment and staged another astounding rally. A rally that saw the VIX confirm the "drop in fear" as it slid from 18 to 15 by the end of trading on November 9th.

No matter how you cut it, it was an unforgettable week of trading.

While it may have been rocky along the way, the election ultimately saw stocks go higher and the VIX go lower - a win for those that sold volatility when VIX was above 22 last week.

Now, with the election a part of the history, a natural question is “What comes next?”

As President-elect Donald Trump has never held public office before, it’s very difficult to forecast how he’ll run his administration. This lack of clarity could mean several things as it relates to volatility trading.

At tastytrade we rely on mean reversion to help us make trading decisions - as well as some core tenets that help guide position deployment and portfolio management. Due to this disciplined approach, there’s an argument to be made that under Trump, it’s “business as usual” in terms of trading approach.

On the other hand, one could also argue that the lack of visibility around Trump’s governing style does demand a repricing of risk premiums. If you take that view, you could take a “wait and see” approach and scale back your portfolio, or raise your threshold of edge when selling volatility.

Another option is to add protective positions to your portfolio that help minimize risk in the event of an adverse market event, as we discussed recently on another blog post.

Had markets actually opened at the lows seen during the overnight session of the election, the protective VIX position outlined in the link above would certainly have been a big winner.

As always, the tastytrade network will be working hard to provide timely and relevant programming to help navigate the “new world” - so we encourage you to tune into tastytrade live when your schedule permits.

If you have any questions about the topics discussed in this post we hope you’ll reach out at support@tastytrade.com.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

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